By ALFREDO GUERRERO RIGHETTO and FERNANDO BADENES GARCÍA-CARO
Article 21 of the Spanish Arbitration Act (AA), governing the civil liability of arbitrators, has been receiving considerable attention since early 2017 as a result of the Supreme Court Judgment 102/2017, of February 15, 2017, on the civil liability suit filed by PUMA SE against the chairman of the arbitration tribunal and the co-arbitrator appointed by the counterparty, ESTUDIO 2000, S.A. (ESTUDIO 2000), in the prior arbitration proceedings between the said parties.
This ruling confirmed that these arbitrators acted with the recklessness required under the relevant provision by having breached the principle of collegiality by excluding the other co-arbitrator, appointed by PUMA SE (PUMA), from the final deliberations and voting on the arbitral award rendered in said proceedings, which was set aside by the Regional Appeals Court (Audiencia Provincial) of Madrid (Section 28) in its Judgment of June 10, 2011, precisely for this reason, ruling that such circumstances violated public policy.
The aforementioned article 21.1 of the AA significantly reformed Article 16.1 of the former AA of 1988, which had provided that arbitrators could be held liable for damages caused by negligence or willful misconduct in the performance of their duties in arbitration proceedings. The introduction of this new provision limited their liability to cases involving "bad faith, recklessness or negligence".
The motivation behind this reform was to avoid the previous exorbitant liability system, based on any type of fault which could in practice result in a situation with a real effect on the impartiality and independence of the arbitrators or even in arbitrators refusing to accept arbitrations for fear of becoming the target of such broad liability.
The ultimate aim of this reform was to codify the concept of "freedom to judge", enshrined in the principle of "immunity" as existing in Anglo-Saxon legislation, and which solely allowed for liability in those cases in which the conduct of the arbitrators was guided by willful misconduct or inexcusable negligence.
Finding of civil liability of the arbitrators in the PUMA case
Before analyzing the legal grounds of the Supreme Court Judgment of February 15, 2017, a brief summary of the facts is provided below:
(1) PUMA initiated arbitration proceedings with ESTUDIO 2000 in relation to a distribution agreement executed between said parties on December 12, 1994; the final arbitral award was issued ordering PUMA to compensate ESTUDIO 2000 in an amount close to €100 million.
(2) The last meeting attended by all members of the Arbitration Tribunal was held on May 31, 2010; no agreement was reached at this meeting regarding the amount of compensation to be awarded to ESTUDIO 2000 in the arbitral award.
(3) On June 2, 2010, the chairman of the arbitration tribunal and the co-arbitrator appointed by ESTUDIO 2000 met, deliberated and issued the arbitral award without convening the co-arbitrator of PUMA to participate in the final deliberations and voting, in full awareness that the latter was traveling on that date.
(4) On that same day, the arbitral award was issued with the signature of said two arbitrators and communicated to the parties and the co-arbitrator appointed by PUMA, specifying in the award that the arbitral award was not signed by the latter because he had not yet consented to the arbitral award.
(5) There was no evidence that the co-arbitrator of PUMA ever adopted dilatory tactics (including attempting to obstruct or block the granting of the award by the majority of the arbitration tribunal). On the contrary, it was proven that there were no reasons of urgency that would have required the arbitration tribunal to issue the arbitral award on June 2, 2010, considering that the deadline for issuing the arbitral award was July 4.
(6) Based on the foregoing, PUMA filed a liability suit against the chairman of the arbitration tribunal and the co-arbitrator appointed by ESTUDIO 2000, claiming the fees paid by PUMA to both arbitrators in the form of arbitration fees, totaling €750,000, plus interest, for each arbitrator.
Liability for breach of the principle of collegiality
The trial court and the Regional Appeals Court hearing the liability suit filed by PUMA both ruled in their judgments that the chairman of the arbitration tribunal and the co-arbitrator appointed by ESTUDIO 2000 were liable under Article 21.1 of the AA on the basis that the defendants excluded the co-arbitrator appointed by PUMA from the final deliberations and voting on the arbitral award in violation of the principle of collegiality, thus committing a manifest, serious and inexcusable error.
In their appeal before the Supreme Court, the appellants alleged an infringement of Article 21.1 and the case law interpreting said provision on two separate grounds.
First, they argued that a finding that the defendants’ conduct met the requirement of recklessness must necessarily be based not only on gross negligence of the arbitrators in the case but must also require an analysis of the intent of the arbitrators. This was supported by the assertion that the co-arbitrator of PUMA engaged in extremely obstructive behavior aimed at preventing final rendering of the arbitral award.
Second, the appellants denied that the recklessness required under the AA could be equated to manifest, serious and inexcusable error, arguing instead that the conduct of the arbitrators was in full compliance with a previous judgement of the Supreme Court which dismissed a claim for annulment of an arbitral award where one of the arbitrators argued that the other two arbitrators ignored the former when rendering the arbitral award.
The Supreme Court confirmed that recklessness does not require intent to do harm but rather is identified as "inexcusable negligence, with manifest and serious error, without justification, and which is not linked to annulment of the arbitral award, but rather to a risky action by someone familiar with their arbitration duties and who should have applied such knowledge in the interests of those who engaged them to carry out the arbitration".
Furthermore, the Supreme Court declared this position in terms that deeply criticized the conduct of the appellant arbitrators, specifying that their conduct was equivalent to the "conduct of someone who, without the least respect for any standard of reasonableness, ignores both the rights of those who commissioned the arbitration and the duties of the arbitrators and endangering the course of the arbitration proceedings by preventing the award from being properly issued, as it happened in this case, with the resulting damages", classifying such conduct, in very harsh terms, as "clearly unusual or unexpected conduct that goes beyond the good judgment of any reasonable human being".
The Supreme Court concluded that the necessary inexcusable negligence to find recklessness in the conduct of the arbitrators was present on the ground that the appellants confused the provisions of Article 37.3 of the AA, which allows for the rendering of awards by a majority of the arbitration tribunal, with the very nature of the principle of collegiality, which requires that all members of the arbitration tribunal participate in all deliberations and votes held in relation to an arbitral award.
We could not agree more with the position of the Supreme Court, given that the fact that all members of an arbitration tribunal make their decisions jointly as a group–ALL OF THEM, only excluding strictly procedural decisions delegated to the chairman of the arbitration tribunal–to safeguard not only the will and autonomy of the parties who have freely agreed to resolve their disputes through the heteronomous means of dispute resolution that is arbitration, but also the impartiality and independence of the arbitration tribunal. This is therefore an issue that utterly affects international public policy relating to arbitration.
Following the Judgment of the Supreme Court on February 15, 2017, there is no doubt that the work of arbitrators will from now on be very closely monitored by the parties in cases of annulment of arbitral awards rendered and which involved any degree of negligence of the arbitrators that ultimately causes annulment of the arbitral award, therefore requiring the parties to initiate new arbitration proceedings, having already suffered the unwanted effects of loss of time and the costs involved by reason of the annulment of the arbitral award.
What will have to be analyzed with the passage of time is the impact this, somewhat, more lax interpretation made by the Supreme Court of the requirements of Article 21.1 of the AA will have in the foreseeable future. Given that such interpretation, which runs contrary to the initial quasi-absolute freedom granted to the arbitrators, will benefit arbitration, as we expect, by eliminating conduct of arbitrator(s) which could, as in the case analyzed, negatively impact the trust placed by the market operators in arbitration as an alternative to ordinary channels for the resolution of disputes. Or, if on the other hand, it will hinder the autonomy of the parties and the arbitrators, who up until now have had the sole control over the direction and development of the arbitration proceedings, making such proceedings more and more similar to the more regulated judicial regime that is the jurisdiction of judges in the courts which is not at all what an arbitral process is about.
Only time will tell.